Savings With a Kick

I've had high-yield online savings accounts for years. I've used them for everything from saving for a down payment on a house to socking away money for Christmas gifts. I like them so much that I've recommended the accounts in several of my columns. And I track the interest I earn on my money like a giddy child on her birthday.

Online savings accounts have become such a big part of my financial life that I'm surprised when I discover that so many people -- especially Internet-savvy young adults -- still don't have one.

For instance, I casually mentioned my online account to a close friend the other day, and she responded, "I've never heard of that!" And I had a similar experience with my dad -- one of the most money-smart people I know. He was as dumbfounded as I was that he didn't have an account of his own.

So out of curiosity, I started asking around among friends and family -- even colleagues here at Kiplinger -- and I couldn't believe how many people said they didn't have an online savings account, even those who knew about them. So where do they keep their short-term savings? In an old-fashioned savings account at their bank, where their money earns peanuts -- or less.

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To all of you, I ask: What the heck are you waiting for?

Not your grandpa's savings account

For those of you claiming ignorance, you get a (skeptical) pass. But if you have heard of such outfits as ING Direct, HSBC Direct, Emigrant Direct and FNBO Direct, you have some explaining to do for your foot-dragging. Even Citibank and Capital One offer high-yield online savings accounts now. If you aren't making money on your savings, you simply aren't trying.

Brick-and-mortar banks have their purpose. But in my view, providing a good place to stash your savings isn't one of them. For instance, at Bank of America, a traditional savings account pays only 0.2% interest on your deposits. That means for every $1,000 you stash away, the bank rewards you with a token $2 per year. At Wells Fargo it's even worse. With a traditional savings account paying 0.05%, you'll earn only 50 cents for every $1,000. Big whoop. That won't even buy a soda at my office vending machine. The fact is, with a traditional savings account, you're basically lending your hard-earned cash to the bank and getting pocket change in return.

Compare that with high-yield online savings accounts, which are currently paying about 2.5% interest. That's $25 for every $1,000 you deposit -- a difference of 4,900% over Wells Fargo. Your emergency savings alone could earn you hundreds of dollars extra each year without you having to lift a finger.

Rates on these online accounts have dropped dramatically lately as the Federal Reserve has slashed interest rates. Although 2.5% may be a far cry from the 5% I earned when I first opened my accounts, it's still sweeter than the brick-and-mortar alternative.

Traditional banks have one thing in their favor: They are convenient. You can go to them to make deposits in person, cash checks, access an ATM, and get rolls of quarters for laundry and parking meters. Those are some reasons I still have a checking account at my local bank, even though many online banks offer tempting high-interest checking.

But primarily, I use the brick-and-mortar bank as a way station to transfer money in and out of my high-yield online savings accounts, and to pay off my rewards credit card every month. (Another way to earn free money without having to lift a finger, by the way, as long as you pay off your balance each month.)

More than the money

High-yield online accounts are ideal for your short-term savings -- any goal for which you'll need the money within three years. For longer-term goals, you'll want to invest your money for higher returns (see Best Buys in Bonds).

Here are six more things I love about online savings accounts, besides the high yields:

1. No minimum-balance requirements. Most accounts carry no fees and don't care how much or how little you save. You can usually open an account with a measly dollar.

2. Easy to use. Simply link your online account to your existing checking account, and you can transfer money between them, no problem. (Many traditional banks don't charge fees for such transfers, but check with yours to make sure.)

3. Safety. The money you save in an account at any of the online banks I mentioned above is insured by the Federal Deposit Insurance Corp. So you don't have to worry about losing it, no matter how crazy the economy has been lately.

4. Automation. You can make saving a habit by signing up for automatic transfers between your checking and savings accounts. That way you don't have remember to log on and manually move your money.

5. Great for goals. With ING, I actually have several subaccounts, including stashes to pay for vacations, insurance premiums, property taxes and home improvement. Dividing up my savings by goal helps me track my progress and make sure my money is where I want it when I need it.

6. Accessible -- but not too accessible. With most online savings accounts, you can't get to the money from an ATM. Plus, transfers from savings to checking usually take two to three business days, so you won't be tempted to raid it for an impulse purchase. But that's usually plenty of time to access the money when you really need it. Besides, many of the rates are competitive with short-term certificates of deposit, which have penalties if you cash out before the term is up.

However, if the two-day lag makes you uncomfortable, you can get instant accessibility by using an interest-bearing online checking or money-market account, which supply you with checks and a debit card. You may sacrifice a bit on your rate, but you'll still make more than traditional savings accounts at a brick-and-mortar bank. For instance, Capital One's Rewards Money Market Account pays 1.75%, versus 2.5% for its online savings account, but you get free checks and an ATM card. And at Everbank.com, the high-interest checking account gives you the same conveniences and pays 1.83% for balances of less than $10,000, and a progressively higher rate for bigger balances. Shop around for the program that fits your needs best.

Choosing an online bank

As mentioned earlier, rates on these accounts have been in flux. One week a certain bank may offer the best rate, while another week that distinction belongs to a different outfit. Chasing yields can be a hassle -- not to mention the minimal rate difference probably won't have a huge impact on your balance.

Instead, in choosing your bank, look for one that has a competitive rate and that fits the criteria above, specifically one that is FDIC insured, has no fees, is easy to use and has a level of accessibility with which you're comfortable. Plus, in these times of financial insecurity, you might feel better sticking with a name you know, rather than a new dot-com you've never heard of.

Good customer service and an easy-to-use interface are also a must. For instance, I have accounts with two online banks. But I keep the bulk of my money in the one that pays the lower interest rate because I find its Web site easier to use and its customer service much more prompt -- and helpful -- than the other bank's.

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